The National Federation of Independent Business (NFIB) said that small business confidence fell in October as owners became more frustrated with the budgetary impasse in Washington. The Small Business Optimism Index dropped from 93.9 in September to 91.6 in October, its lowest point since March. As such, it mirrored similar drops in consumer confidence, both from the Conference Board and the University of Michigan. In each case, the decrease in sentiment was enough to erase most of the gains in attitudes experienced year-to-date. With that said, I would expect each to rebound in the coming months, assuming government actions do not once again hinder that from happening.
In the case of the NFIB survey, the percentage of respondents saying that the next three months were a “good time to expand” dropped from 8 percent to 6 percent. The average reading on this indicator through the first 10 months was 6.3 percent, down from 6.7 percent for all of 2012. For those saying that it was not a good time for expansion, the top reasons cited continue to be economic conditions and the political climate. Respondents said that government regulations were the “single most important problem,” cited by 21 percent of those taking the survey. This was followed by taxes (20 percent) and poor sales (17 percent).
Outside of the impacts of the government shutdown, weaker expected sales growth was one of the key factors in reducing optimism in October. The net percentage of those saying that they expect higher sales over the next three months dropped from 8 percent to 2 percent, the lowest points since the net decline predicted in March. Not surprisingly, earnings growth also remained weak.
The pace of hiring and capital spending growth eased for the month, as well. The net percentage of those taking the survey that plan to add workers in the next three months declined from 9 percent to 5 percent. With that said, the percentage of firms with job openings that they cannot fill edged slightly higher, up from 20 percent to 21 percent – perhaps a hopeful sign. On a similarly mixed note, capital investment plans were off from 25 percent to 23 percent, even as the actual level of capital expenditures over the past six months reflected a slight uptick.
Overall, though, the NFIB survey found that small business owners remain quite anxious about the economy, with political headwinds sending confidence sharply lower in October. Moreover, sentiment continues to be subpar overall, reflecting softer small business sales growth. The Small Business Optimism Index remains well below 100 – its threshold for stronger economic activity.
Chad Moutray is the chief economist, National Association of Manufacturers.